• Companies increasingly pay work fees to third-party lenders for potential ‘deal aways’
• Break fees, commitment fees, and expense reimbursement start becoming more common in LME deals
• Tropicana pays commitment fee to TPG in recent LME deal

When Tropicana found itself staring down a liquidity squeeze in March, it had two choices: strike a deal with its existing lenders or receive fresh capital from outside players. Behind the scenes, third-party lenders like TPG Angelo Gordon put forward proposals for the juice maker – ones that didn’t ultimately win, but still secured them a payout.

That compensation, while not yet the norm, is gaining traction. Lenders are increasingly requesting million-dollar work fees just for submitting a credible rescue finance proposal. These fees cover the time and resources needed to conduct diligence, structure terms and craft a good offer. Companies would pay up even if they opt to go back to their existing lenders.

“We’re turning to a world where if you’re a real firm, to actually roll up your sleeves and put together a credible third-party proposal, you need to be compensated,” said a third-party lender.

Third-party lenders are no longer willing to do extensive work for free, only for the company to go back to the existing lenders, said Justin Lee, global head of liability management and strategic capital solutions at Weil.

“Third-party lenders being asked to do the work and provide commitments want compensation for their people’s time and energy, not just lawyer fees,” Lee said. “Of course, borrowers are keen to keep their costs and exposure to a minimum for the overall process.”

“We certainly asked for it in several situations and have been successful in receiving some amount of fee, albeit modest,” said a second lender.

When a borrower agrees to pay a work fee, it shows that it has a higher level of commitment to do a ‘deal away’, rather than just use third-party lenders as a Plan B or Plan C, noted Ropes & Gray partner Milap Patel.

While third-party financings are threatened in almost every liability management deal, they are seldom implemented as sponsors prefer to strike a deal with existing creditors, especially if a maturity is approaching, noted Scott Greenberg, global head of Gibson Dunn’s reorganization practice.

Greenberg and his team at Gibson, known for engineering some of the market’s most complex and high-profile transactions, noted that the presence of subordination protection in credit agreements can align drop-down proposals from existing lenders and third-party financing providers.

“However, in the absence of subordination protection, existing lenders can typically offer a priming facility and be more competitive in pricing given their attachment point,” he noted.

How we got here

The dynamic first emerged with Envision’s third-party ‘deal away’ three years ago, when the company transferred valuable assets to an unrestricted subsidiary and raised new financing from outside lenders – bypassing existing creditors and setting a precedent for similar liability management strategies.

Since then, issuers continued to engage with outside firms to create competitive tension, even if they ultimately closed a deal with their existing creditors. For sponsors, third-party proposals serve as a powerful lever to extract discounts, extend maturities, or secure lower coupons from existing lenders.

“For companies, the ‘deal away’ may be used as a credible alternative to an existing lender deal,” Lee said. “A strong ‘deal away’ threat can motivate concessions from existing parties.”

But over the past half-year, third-party lenders grew fatigued as they frequently submitted serious proposals that never led to a deal.

“Third party lenders are spending a lot of time and resources on structuring third party deals, only to find the sponsor ending up doing a deal with existing lenders,” said a lawyer. “Last year, there may have been two third-party ‘deal aways’ out of 100 deals. That’s a low hit rate.”

Sponsors have started to cover legal and diligence expenses, but for third-party lenders that is often not enough to compensate them for the time spent analyzing the company, the structure and the litigation risks, he continued.

What getting paid looks like

Third-party lender compensation looks different in each case, but it could include expense reimbursement, upfront work fees, commitment fees, and break fees. While legal reimbursement has long been commonplace, what’s now changing is the push for more substantial compensation earlier in the process.

Break fees, which involve compensation if a letter is signed but the deal is abandoned, are often structured as 50% and upwards of what the lenders would have otherwise earned, said the lawyer. Meanwhile, commitment fees are tied to a signed offer, usually 2%-4% of committed capital.

Work fees, which involve a flat payment for time and effort before a commitment is signed, typically range from USD 1m to USD 3m, according to the two lenders and the lawyer.

“You [ask] for three things,” the first lender explained. “One, we want exclusivity. Two, we want my legal fees reimbursed. And three, we want to be compensated as we work towards a commitment.”

The fee amount needs to strike a balance – significant enough to signal the company’s commitment and respect for the investor’s time, but not so large that it becomes an obstacle to completing the deal.

The ideal figure varies based on the size of the transaction and the company’s financial position, said the second lender, noting that the borrower is essentially paying 1% of the transaction size to create competitive tension and potentially reduce cost of capital. “Even shaving 20bps off a five-year deal pays for itself.”

Other payout strategies can include participation rights in future deals, according to Leonard Klingbaum, co-head of Ropes & Gray’s global finance group who leads the firm’s credit opportunities practice.

“This way, the third-party provider gets fee coverage or expense reimbursement, but also an opportunity […] to deploy capital into a live deal,” Klingbaum continued.

Inside Tropicana

Tropicana is one example where the company considered a ‘deal away’, paid third-party lenders, but didn’t ultimately do the deal. In the end, the juice maker executed an exchange with 99% of its first-lien and 85% of its second-lien lenders.

The PAI Partners and Pepsico-backed orange juice maker’s aggressive liability management exercise involved issuing USD 519m in superpriority debt, of which USD 400m was new money, and subordinating the rest of its capital structure.

Lenders were heavily incentivized to participate in the deal even though members of a majority group of lenders received much better terms than other lenders, as reported.

On the sidelines, the company was also engaging with third-party lenders, including TPG. While the ‘deal away’ did not end up happening, TPG received a commitment fee for their work, a small percentage of the originally committed capital.

Tropicana, PAI, TPG and Gibson declined to comment on the matter. Pepsico did not respond to requests for comment.

A growing but still occasional phenomenon  

To be sure, some market participants say the trend is overstated.

“It sounds like there may be a few cases here or there, but it is certainly the exception and not the rule,” said Greenberg. “Perhaps we are poking the bear, but I think until you see it really tick up in practice, [third party financings] will continue to be a bit of a hammer for negotiations rather than a real alternative,” he continued.

Davis Polk’s Brian Resnick, who runs the firm’s liability management and special opportunities practice, pointed to the ongoing competition between third-party funds as a limiting factor.

“We’re seeing third-party lenders not have negotiating leverage for compensation,” he said. “They’re sometimes able to get a modest work fee, but mostly there’s enough competition, even for the particularly distressed situations, that they just don’t really have the leverage.”

He added that moderate work fees, perhaps in the few hundred thousand dollar range, are sometimes discussed but they’re “not real compensation” but rather cover some expenses.

Most third-party proposals still don’t get chosen. The cost of capital is usually lower with existing lenders, and companies are incentivized to go that route.

Even if ‘deal aways’ rarely cross the finish line, the growing demand for work fees and break protections has already started reshaping the LME process.

“No one wants to be the bridesmaid forever,” the second lender said. “I’ll work with you, but you have to pay me something to make it worth my time, even if we don’t ultimately win the transaction. You get paid to lose,” he concluded.